Is a Health Savings Account Ideal Or a Waste of Time?

People ask me all the time to explain HSAs. I’ll try to keep it short and to the point and give you a basic idea of what an HSA is, and if it’s right for you or a waste of time.

It comes down to your age, goals, income, and how you use health insurance.

The US Dept. of Treasury has an official 40 page pamphlet. I’ve had hundreds of clients look at this 40 page document. It’s like many government documents, long, complicated and nearly impossible to understand. If you want to see the entire document you can easily download it from my website in the FAQ section, where I have tons of information on insurance.

Think of it this way. An HSA is a special tax deferred bank account you open. It’s a separate entity from your health insurance plan. You deposit money. The HSA works in tandem with an approved health insurance policy. An HSA is like a medical IRA or medical 401K retirement type of plan. You use the HSA to pay co-pays and medical bills. Many banks give you a special HSA debit card and checks.

The Federal Government sets contribution limits each year for individuals and families, just like an IRA or 401K plan. In 2009 the limits are $3,000 for individuals and $5,950 for families. In 2010 the contributions are $3,050 for individuals and $6,150 for families.

The money you put into your HSA is pre-tax dollars, just like an IRA or 401K plan. It’s another way to save money in a tax deferred account for retirement. The money you contribute lowers your taxes.

Here’s how it works: When you file your tax return whatever money you put into the HSA that year comes right off the top of your gross income. So for example: Let’s say your gross income is $30,000. And you put $3000 into your HSA that year. Your taxable gross income goes down $3000 bucks from $30,000 to $27,000. You then pay taxes on $27,000 instead of $30,000. That helps your tax bill.

One question I get asked all the time is, “Can I pay for my insurance with the HSA?” The answer is, “No.” You can’t pay for health insurance premiums out of your HSA. But you can pay for nearly all other medical bills such as: office visit co-pays, prescriptions, labs, ER, surgeries, hospital costs, and medical supplies.

Do you use Alternative Medicine? If “Yes,” and you understand how to use the system, HSAs can be an ideal way to pay for things insurance policies won’t and you also get a tax benefit. You can pay for massage therapy, chiropractic, acupuncture, physical therapy, homeopathic and natural herbal medicine, vitamins, excess dental or vision needs, special screenings, and in some circumstances Mid-Wives and alternative birthing. People who understand how to get around the rules in legitimate ways, can save thousands of dollars.

The key is that YOU get to decide how to use this tax deferred HSA money for your medical needs. And whatever money is left over at the end of the year, rolls over into the next year and keeps growing. And like an IRA or 401K plans, when you turn 65 you start to withdraw the money. I suggest anyone considering an HSA discuss rules and advantages with your tax advisor.